Analysis

North American workers wait for raises as job growth continues: Don Pittis

Spurred by NAFTA optimism, employment growth could push jobless rates even lower. And despite business fears, there are reasons higher wages would be good for the economy.

A NAFTA deal could boost wages which should make the economy more efficient, not less

Prime Minister Justin Trudeau takes a signature mass selfie with steel workers in Hamilton, Ontario last month. Despite strong job growth wage increases remain slow. (Mark Blinch/Reuters)

One of the simplest rules of economics is that when things are in short supply, prices rise enough to make the problem go away.

Yet as unemployment rates in Canada and the United States reach lows not seen for decades, so far, that rule seems to have been broken.

In Canada, last week's employment figures showed that in spite of repeated worries that a weaker economy will end the jobs boom, employers created 32,000 new ones, with full-time jobs replacing part-time work.

U.S. figures released the same day showed unemployment continuing its decline, falling to nearly 20-year lows. If the trend continues, jobless rates are on the verge of plunging to levels not seen since the 1960s.

That is not far-fetched. Many economists say the continued departure of baby boomers from the economy will only increase the shortage.

The NAFTA advantage

President Donald Trump's war of words with China remains a risk for the global economy, but completing a NAFTA deal will mean low unemployment in the U.S. will have a cross-border effect in Canada too, drawing on Canadian skilled labour to serve U.S. production.

And while the business press expresses worries about the danger of rising wages leading to inflation, the same basic economic theory tells us that increasing the price of things in short supply is good for the wider economy in two ways.

It forces the economy to produce more. And it makes business use those things more efficiently. 

Increase wages should increase supply and allocate workers to where they are most productive. (Mark Blinch/Reuters)

In parts of the U.S. and Canada, a worker shortage is becoming a reality. And so far the moderate wage increases that have been happening have not been enough to plug the gap.

"The crux of the problem is that we don't have the people here," a Midwest truck manufacturer told the Wall Street Journal in an article with the headline "Iowa's Employment Problem: Too Many Jobs, Not Enough People."

In parts of the Midwest, even job-skills training programs can't find unskilled labourers to train. Meanwhile, officials try to get more ex-convicts and disabled people into the workforce.

Supply and demand

"If the only way people will take a job is by paying them more, then that's the basic argument of supply and demand," said University of Waterloo labour economist Stéphanie Lluis.

When Canada's oil industry needed workers, it raised wages and drew people from across the country.

Not only that, raising wages when workers are in short supply makes the entire economy run more efficiently.

"The supply-demand argument will allow better allocation of workers into jobs," Lluis said.

When the world thought it was running out of oil, an increase in prices prompted engineers to develop oil sands technology. High wages in Alberta drew workers from across the country. (Todd Korol/Reuters)
 

In the case of the petroleum industry, the efficient allocation argument is obvious. When oil was in short supply and prices were rising, high wages drew people from dying industries and marginal jobs to a highly productive sector. 

It's well-known in the world of business that the rising cost of one ingredient in a process will encourage businesses to look for alternatives. The same thing applies to labour.

In that way, higher wages should also lead to innovations in robotics and innovation making the workforce more productive. Increased productivity — where more goods and services are created with fewer workers — is one of the holy grails of economics.

In past discussions, economists have tried to explain why wages don't seem to have budged, blaming failed government policy, a lack of patience, a glut of discouraged workers and global wage competition from the developing world. Others have said a weakened trade union movement has made employers complacent. 

Waiting for trade certainty

Economist Frances Woolley had a few more suggestions about the forces that may be holding wages down.

One example she offered is Canadian companies that have trouble getting employees because they pay less than their U.S. competitors.

"Canadian firms don't go and offer competitive wages," said Woolley, an economics professor Carleton University who specializes in government policy and labour economics. "They say, 'Oh no, there's a labour shortage' and lobby for a program to bring in workers."

Another impediment to raising wages is that employers can't just raise wages to attract new workers and fill gaps. Woolley offered the example of the firm with 1,000 workers that needs 10 more.

In the oil industry, where the money was flowing and everybody got pay increases, wage differentials were enough to make people pull up stakes and move to a new job. Small wage hikes are less persuasive, she said.

"You could go out and pay a lot of money to get 10 more workers. Then those thousand workers would say 'Hey, wait a sec,'" Wooley said. It would end up costing the employer a lot more.

A resolution of NAFTA after months of uncertainty may inspire confidence among employers, but new uncertainty caused by Trump's threat of a trade war with China may mean the beneficial effects of rising wages will have to wait.

Woolley pointed out that employers are wary of raising wages until they are sure the economy is stable and their markets secure. While offering a raise makes people a little happier, cutting wages once they've been handed out makes employees very unhappy indeed.

Follow Don on Twitter @don_pittis

About the Author

Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.

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